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AGU AT A GLANCE

P/E ► 9.84 LOW EV/EBITDA ► 6.65 AVG ROA ► 9.4% AVG ROE ► 19.2% AVG Debt to Equity ► 1.17 AVG Current Ratio ► 1.95 AVG Interest Coverage Ratio ► 9.31 AVG

 

 

 

 

 

 

Agrium Inc. (NYSE:AGU) makes fertilizer. Biofuel production has increased the demand for grain crops and, as a consequence, Agrium's fertilizer products. In Q1 of fiscal year 2008, Agrium reported record net earnings of $195 million, up from a net loss of $11 million during the same period in 2007.^[1]

Agrium acquired fertilizer distributor UAP Holding (UAPH) in Q1 2008, which brings its market share in the retail fertilizer business to 16%.^[2] Potash Corporation of Saskatchewan (POT), Terra Industries (TRA), and Mosaic Company (MOS) compete with Agrium in the fertilizer market.

Business Overview and Financials

Business Breakdown

2007 EBITDA by Business Unit & Product^[3]

• Wholesale Division (76% of sales, 70% of income): Agrium's wholesale segment produces nitrogen, phosphate, and potash fertilizer. Agrium has the capacity to produce ten million tonnes of these plant nutrients annually. This includes about 6.1 million tonnes of nitrogen, 2.1 million tonnes of potash and 1.3 million tonnes of phosphate. Of these three macronutrients, nitrogen is the most profitable and important to Agrium, accounting for 62% of Wholesale sales and 63% of gross profit. Urea is the largest of AGU's three nitrogen products on a volume (41% of total nitrogen) and gross profit basis (57% of nitrogen mix). 30% of sales are urea, 14% are ammonia, 15% are potash, and 10% are phosphates.^[4] Due to soaring commodity prices and a worldwide food shortage, demand for these three macronutrients has soared and continues to increase, resulting in elevated profit margins for manufacturing companies. ^{[citation needed]}

• Retail Division (21% of sales, 29% of income): Agrium is North America's largest retail provider of agricultural services and products and makes seed, liquid and dry fertilizer, herbicides, insecticides and fungicides for consumer use.^[5] With the acquisition of UAP Holding (UAPH), Agrium's retail segment nearly doubled in size. Retail contributed $210-million in EBITDA in 2007, a 68 percent increase over the $125-million in 2006. Contributions from South American operations rose nearly 65 percent in 2007 to a record $49-million.^[6]

• Agrium Advanced Technology (3% of sales, 1% of income): Agrium makes controlled-release fertilizer, micronutrients, professional turf, horticulture and specialized products for consumers in this segment. ^[7] Agrium Advanced Technologies has production in seven facilities in North America with the combined capacity to produce over half a million tonnes of controlled-release fertilizers annually. ^[8]

Financial Metrics

Agrium benefits from rising product prices. A $10/ton change in potash prices yields $0.10 per share; a $10/ton change in phosphate prices yields $0.05 per share; and a $10/ton change in ammonia prices yields $0.07 per share. ^[9]

AGU Profits: Businesses and Products^[10]

AGU Net Sales and Gross Profit^{[11] [12]}

UAP Holding (UAPH) Acquisition

Agrium acquired the fertilizer distributor UAP for $2.7 billion (or $39 per share) in the first quarter of 2008. In the retail business, the company has boosted its market share to 16% after the acquisition of UAP, with a combined net sales figure of $6 billion.^[13] The following figure shows the individual retail revenue for AGU and for UAP as well as the combined retail revenue that would have resulted from the acquisition in previous years.

AGU Retail Revenue with UAP acquisition^[14]

Acquisition of CMF =

In July 2008, Agrium acquired 70% equity stake in Common Market Fertilizers S.A (CMF), Western Europe’s leading fertilizer distribution company. CMF services more than 1,500 customers generating an annual revenue of approximately US$600mn and a sales volume of 2-2.5 mn tons. CMF has a strong presence in Europe, particularly, France, Germany, Italy and the United Kingdom. Agrium’s Retail business will greatly benefit from an increased geographical presence.^[15]

Key Trends and Forces

Rising, Record-Level Commodities Prices Cause Profit Margins to Soar

Agrium's Wholesale division produces three main macronutrients: Nitrogen, Potash, and Phosphates. The price outlook for nitrogen for the second half of 2008 has been boosted due to increasing worldwide demand, namely in China, India, and Brazil.^[16] Globally, base potash prices also continue to increase, as there are limited supplies available to meet growing demand in many major countries, including China and the US. ^[17]

Phosphate prices have also continued to move higher due to soaring demand from India, Australia and Latin America. Demand for these three macronutrients is expected to increase and be sustained at these high levels for until at least 2010.^[18]

Soaring Natural Gas Prices Cut into Fertilizer Production

Natural gas is the primary raw material used in the production of nitrogen-based fertilizer. At present North American natural gas prices, natural gas accounts for almost 90% of the cash cost of producing ammonia, the building block for all nitrogen products.^[19] In the Wholesale business, Agrium has a competitive advantage of having low-cost Argentine and Alberta gas. The company is a low-cost producer with 67% of its nitrogen capacity in Canada where it receives a $1-2/MMBtu discount to US Gulf natural gas.^[20] Nevertheless, increasing natural gas prices will be a detriment to fertilizer production for Agrium.

Rising Worldwide Demand for Food Increases Profit Margins

The global grain supply/demand fundamentals continued to push crop prices higher over Q1 2008. For example, U.S. corn exports are forecasted by the United States Department of Agriculture (USDA) to be a record 2.5 billion bushels in the 2008 marketing year, while world grain consumption is forecast to increase by over three percent. The tight supply/demand balance for grains is expected to continue for at least the next few years and it will take an extended period of strong production to bring global grain stocks back to comfortable levels.^[21] As demand for food increases and remains high, margins will remain higher for Agrium and its competitors in the agricultural, fertilizer, and chemical manufacturing sectors.

Competitor Analysis

Agrium's competitors include other large integrated fertilizer producers, cooperatives, divisions of agricultural-focused companies, regional distributors and independent dealers.

Agrium's most direct competitors include Potash Corporation of Saskatchewan (POT), Terra Industries (TRA), and Mosaic Company (MOS). Agrium and Terra specialize in nitrogen, Potash specializes in potash, and Mosaic in phosphate.

References

1. ↑ Agrium Q1 2008 Conference Call Transcript
2. ↑ Agrium Investor Presentation
3. ↑ Agrium Investor Presentation
4. ↑ AGU 2007 40-F, Item 2 pg. 31
5. ↑ Agrium Company Overview
6. ↑ AGU 2007 40-F, Item 2 pg. 20
7. ↑ Agrium Company Overview
8. ↑ AGU 2007 40-F, Item 2 pg. 50
9. ↑ AGU 2007 40-F, Item 2
10. ↑ Agrium Investor Presentation
11. ↑ AGU 2007 40-F, Item 2 pg. 19
12. ↑ AGU 2005 40-F, Item 2 pg. 21
13. ↑ AGU 2007 40-F, Item 2 pg. 19
14. ↑ Agrium Investor Presentation
15. ↑ Acquisition of CMF
16. ↑ Agrium Q1 2008 Conference Call Transcript
17. ↑ Agrium Q1 2008 Conference Call Transcript
18. ↑ Agrium Q1 2008 Conference Call Transcript
19. ↑ Agrium Annual Information Form
20. ↑ Agrium Fact Sheet
21. ↑ Agrium Q1 2008 Conference Call Transcript
22. ↑ Agrium Investor Fact Sheet
23. ↑ Potash Market Information
24. ↑ Mosaic Fact Sheet Apr 2008
25. ↑ Terra Industries Fact Sheet